Investing in ireland a survey of foreign direct investors

Investing in Ireland
A survey of foreign direct investors
A report from the Economist Intelligence Unit
Sponsored by Matheson Ormsby Prentice


Investing in Ireland: A survey of foreign direct investors

Contents
About this report

2

Executive summary

3

Introduction: Market access – Ireland’s FDI foundation

6



8

Four alternatives: Market access drives investment in China, Singapore, the UK and the US

The corporate tax infrastructure: An important ingredient

9

The talent base: A differentiator under threat?12
Ireland’s biggest disadvantages: Outside control of policy15
Responding to the crisis: Boosting competitiveness at the same time19




Financial regulation: Getting the balance right

21

Conclusion: Ireland’s unique selling proposition

22

Appendix: Full survey results

23

© The Economist Intelligence Unit Limited 2012


Investing in Ireland: A survey of foreign direct investors

About this
report

Investing in Ireland: A survey of foreign direct investors is an
Economist Intelligence Unit report sponsored by Matheson
Ormsby Prentice. It examines the main factors that bring

foreign direct investment to Ireland and the main ongoing
challenges in attracting investment. Ronan Lyons was
the report author. Aviva Freudmann and Jason Sumner
were the editors.
To support this study, the Economist Intelligence Unit
conducted a survey of 315 global respondents during
September and October 2011. All respondents had
responsibility for or familiarity with their companies’
investment decisions; and all had familiarity with their
companies’ current or prospective investments in Ireland.
Overall, 60% of respondents were from companies with
current operations in Ireland, and 27% were from companies
not currently doing business in the country but planning
to invest within the next three years. A small proportion of
the sample (about 10%) was not currently invested and not
planning to invest in the next three years. Respondents were
split roughly equally between large firms (51% from companies
with over US$500m in annual revenue) and small firms (49%
from companies with revenue below US$500m). They held
senior positions in their organisations (87% C-level) and were
spread throughout the world: 55% from North America; 21%
from western Europe; and 24% from the Asia-Pacific region
or emerging markets. By sector, 49% came from the financial
services industry; 15% from the IT/online sector and the rest



came from multiple sectors, including pharmaceuticals.
To complement the survey findings, the Economist Intelligence
Unit also conducted wide-ranging desk research and in-depth

interviews with several executives and experts. Our thanks are
due to the following for their time and insights:
l Lionel Alexander, vice president and managing director
(Manufacturing), Hewlett Packard
l Paul Duffy, vice president, external supply operating unit,
Pfizer
l John Fitzgerald, head of macroeconomics, Economic and
Social Research Institute
l John Herlihy, vice president of international SMB sales,
Google
l Bob Keogh, director, Goldman Sachs Bank (Europe)
l Philip Lane, professor of international macroeconomics,
Trinity College Dublin
l Sean McEwen, director (Ireland), Abbott
l Peter Neary, professor of economics, Oxford University
l Christian Saller, managing director, KAYAK Europe
l Willie Slattery, executive vice president and head of
European offshore domiciles, State Street Corporation
l Michael Whelan, director and chief country officer (Ireland),
Deutsche Bank

© The Economist Intelligence Unit Limited 2012


Investing in Ireland: A survey of foreign direct investors

Executive
summary

The survey

suggests that
investors
see Ireland’s
unique selling
proposition
as not a single
factor, but
the powerful
combination of
benefits that
Ireland offers.



Global foreign direct investment (FDI) dropped
precipitously from the height of the boom years
to the depths of the downturn and is only just
now recovering. In terms of jobs created through
FDI, the numbers are stark: they declined from an
estimated 1.3m globally in 2006 to just 750,000 in
2009, according to the 2011 Global Location Trends
report by the IBM Institute for Business Value. But
by 2010 there were evident signs of recovery, with
almost 1m FDI-driven jobs created globally.
Nowhere is this resurgence more important
than in Ireland, where FDI played such a crucial
role in its economic success before the financial
crisis and will determine so much of its economic
prospects in the years ahead. And the signs
there are pointing to recovery too. According to

the IBM report, Ireland was the top destination
worldwide in 2010 for the average value of
investment projects, and the second-largest
per-head recipient of FDI jobs after Singapore.
IDA Ireland, the agency responsible for industrial
development in the country, reported a record
year in 2011, with 148 new investments creating
over 13,000 new jobs. Key questions are whether
FDI will continue to grow again in Ireland
and what policymakers can do to strengthen
the country’s unique selling propositions for
investors.

© The Economist Intelligence Unit Limited 2012

This report seeks to aid that process by
examining Ireland’s competitiveness and the
challenges it faces in appealing to international
investors. It is based on a survey of over 300
executives with responsibility for and knowledge
of investments in Ireland, as well as a series
of interviews with key FDI decision-makers in
Ireland and abroad.
As the report demonstrates, Ireland’s most
important competitive advantages are access
to EU markets, a competitive corporate tax
infrastructure (including the headline rate and
a number of other incentives including doubletaxation treaties and sector-specific incentives),
a uniquely talented workforce – both homegrown and from abroad – and a stable regulatory
framework that supports business. Indeed, the

survey suggests that investors see Ireland’s
unique selling proposition as not a single
factor, but the powerful combination of these
benefits that Ireland offers. Each of these four
cornerstones of Ireland’s competitiveness
is explored in detail in this paper: access to
EU markets (see page 6); the corporate tax
infrastructure (see page 9); the talented
workforce (see page 12); and the regulatory
framework, including specifically financial
regulation (see page 21).


Investing in Ireland: A survey of foreign direct investors

The disadvantages in the eyes of investors,
however, are largely out of policymakers
hands and include the country’s small size and
instability in the euro zone. On the whole, the
survey sample and interviewees are bullish on
Ireland, with two particularly positive findings
emerging from the survey. First, of the 315
respondents, only ten say that they plan to
reduce their level of investment in Ireland over
the next three years. Second, extrapolations from
survey responses suggest that the respondents’
levels of investment over the same time frame
could create up to 20,000 new jobs. Although
this is based on opinion data and is not a rigorous
economic forecast, it is a demonstration of

investors’ strong confidence in Ireland as a place
to do business in the near term. In addition,
interviewees overwhelmingly view the financial
crisis as an opportunity to boost Ireland’s
competitiveness.
The key findings from the research are as follows.
Access to European markets is Ireland’s
FDI foundation. Survey respondents and
interviewees were clear about the foundation
of their investment in Ireland: market access.
In general, global investors say their prime
motivation for entering foreign markets is
access – for 58%, this is the most important
consideration, far outweighing the second and
third most popular factors, namely availability
of key skills (34%) and government incentives
(32%). When it comes to Ireland specifically,
access comes out on top, with “access to EU
market” named by 46% of respondents, compared
with 30% citing legal and fiscal stability and 29%
citing the competitive corporate tax rate. Other
important drivers are also tax-related, including
favourable double-taxation treaties (16%) and
sector-specific incentives (14%).
The headline corporate tax rate is important for
competitiveness but it should be thought of as



© The Economist Intelligence Unit Limited 2012

one ingredient in the overall tax infrastructure;
and policymakers need to put it in context
when compared with other investment drivers.
Almost one-half of respondents (46%) say a
low corporate tax rate is the most important
government fiscal incentive they consider when
investing abroad, and this was a particularly
important component in decisions to bring
investment to Ireland originally. The headline
rate is clearly important. However, evidence
from the survey and interviews suggests
that excessive focus on the headline rate
threatens to overshadow the total corporate
tax infrastructure including double-taxation
treaties, tax credits, transfer pricing or other
sector-specific incentives. It also needs to be put
in context with other aspects of competitiveness,
such as personal income tax reform or access
to skills and talent. When choosing among
government incentives, pharmaceutical firms
were the most likely to cite the corporate tax rate
as their biggest draw to foreign markets, with
65% pointing to this factor. Respondents based
in the euro zone attached a similar importance
to low corporate taxes (64%). US investors put
less emphasis on the issue (35%), as did those
planning to invest in Ireland for the first time
(33%).
Investors praise Ireland’s pool of domestic and

foreign workers, but income taxes could be
discouraging senior talent. Survey respondents
and interviewees say the quality of the local
labour force is a strong point, especially the
presence of formal qualifications and more innate
abilities such as a practical approach to problemsolving. Nonetheless, interviewees are concerned
about what they see as imbalances in Ireland’s
personal tax system. As a result of tax credits that
are generous by international standards, there
is a large gap between the average all-in tax rate
paid by the typical worker, which is among the
lowest in the OECD, and the marginal tax rate
for top earners, which is among the highest.
Interviewees believe that these high marginal


Investing in Ireland: A survey of foreign direct investors

tax rates will make it less attractive for senior
executives to settle in Ireland.
The biggest disadvantages for investors are
outside the Irish government’s direct control,
but respondents say more should be done to
improve regulation and reduce red tape. The
biggest downside of doing business in Ireland,
cited by 51% of those surveyed, is the size of the
domestic market, but this is a factor policymakers
can do very little to influence. Three other factors
which received more than 30% of responses
included instability in the euro zone (33%),

uncertainty in relation to government finances
(32%), and Ireland’s peripheral location (31%).
Ireland’s location mattered more to financial
services firms than other sectors participating
in the study, highlighting the importance of
clusters. Investors across the board say Ireland
could improve on regulation and red tape.
Ireland is generally perceived as a more costly
place to do business than other investment
locations. According to investors, Ireland
compares unfavourably with other countries
across a range of cost criteria, with wages and
salaries the biggest concern: 51% say Ireland is
more expensive than other locations where they
are invested, compared with 16% who say it is
cheaper. The cost of raw materials, the cost of
living and the price of utilities and infrastructure
also compare unfavourably. The high cost
of doing business was highlighted across all
sub-groups in the survey, but the perception is
greatest among those with no presence in Ireland
and no immediate plans to invest. There were
variations according to location – euro zone and
US investors were much more likely to believe
Ireland was a costly place in which to do business
than investors from other developed countries.



© The Economist Intelligence Unit Limited 2012

Respondents believe the Irish government’s
post-crisis response is on the right track
and view the country as an investment
opportunity. While there was little belief
among respondents that Ireland would rebound
quickly, there was definitely a sense, particularly
among interviewees, that Ireland’s economic
crisis represents a huge opportunity from an
FDI perspective. Overall, investors have more
faith in the current Irish government than
the previous one, although views are far more
favourable among investors currently located in
the country than among those based outside.
The government’s priorities are also in line with
investor expectations – stabilising the financial
system, attracting inward investment and
addressing the budget deficit.
Some post-crisis policies will not require
trade-offs between stabilising the financial
system and boosting Ireland’s investment
competitiveness, but in other areas
policymakers will have difficult choices.
Tackling the high cost of doing business in
Ireland is both a domestic vote-winner and a
competitiveness-booster. Likewise, tackling
the deficit supports both domestic economic
sustainability and convinces international
investors that Ireland is a sound place in which
to do business. Other aspects of Ireland’s

recovery, however, have very real trade-offs.
One example is higher value-added tax, which
may help close the deficit but pushes up
Ireland’s already high cost of living, affecting
competitiveness. Another potentially more
serious issue is the area of financial regulation,
where interviewees believe that the government
has failed to distinguish adequately between
regulations on domestic banking and those on
international financial services.


Investing in Ireland: A survey of foreign direct investors

Introduction

Market access – Ireland’s FDI
foundation
A major
factor behind
Ireland’s
success in
the 1990s,
and a key
differentiator
between
Ireland of the
1970s and of
the 1990s,
was improved

access to the
EU as a result
of the Single
Market.
Peter Neary, professor
of economics at Oxford
University


The single most important reason why companies
in the survey look to invest in countries
outside their home markets is to access new
markets: three in five (58%) respondents
highlighted market access as one of their top
three motivations for setting up international
operations, ahead of eight other factors,
including availability of key skills (34%),
government incentives (32%) and ease of
doing business (32%). The respondents’ four
top FDI locations other than Ireland all offer
market access as a key part of their competitive
proposition, either domestically, as in the case of
the US and China, or regionally, as with Singapore
and the UK (see sidebox, this chapter).

Financial services and the rest
– differing FDI priorities
The importance of market access is similar across
financial services (FS) and non-financial services
(non-FS) respondents, with 55% of non-FS

respondents mentioning it as a key factor for
going international, compared with 61% of FS
respondents. There were differences in secondary
factors, though. Government incentives and
the ease of doing business are both mentioned
© The Economist Intelligence Unit Limited 2012

by almost 40% of FS respondents, compared
with about 25% of others. In turn, the cost base
matters more for non-FS respondents, with over
40% mentioning either labour or non-labour
costs as a factor for going international, almost
twice the level of FS respondents.

Ireland’s specific advantage: access to
the EU
When asked specifically about Ireland’s main
competitive advantages, access to European
markets topped the list, with 46% of respondents
citing it, much more than any other factor (see
Figure 1). Interviewees’ opinions reflected the
survey findings. “A major factor behind Ireland’s
success in the 1990s, and a key differentiator
between Ireland of the 1970s and of the 1990s,
was improved access to the EU as a result of the
Single Market,” says Peter Neary, professor of
economics at Oxford University.

Differences between first-time
investors and those with existing

operations in Ireland
The factors stressed as Ireland’s main competitive
advantages by those planning to invest there
for the first time generally mirror those cited by
the sample as a whole, with access to EU markets
(44%) the principal competitive advantage,


Investing in Ireland: A survey of foreign direct investors

Figure 1
In your view, which competitive advantages does Ireland have to offer?
Respondents could select up to three responses
(%)

Financial Services

All

Non-Financial Services

60

60

50

50
46

40
30
20

22

10

Bob Keogh, director of
Goldman Sachs Bank
(Europe)



10 9

1212 13

14

16
12

15 15 15

24 25 24

28

26

29

31
27

30

43

40
30

33
26

20

16

10
10

although greater emphasis was placed on access
to government and ease of doing business.
Access to skills, either locally or from across the
EU, was less important: just 36% of respondents
mentioned either factor, compared with 51% of
all respondents.
For respondents with existing operations, the

corporate tax rate was the main driver that had
brought them to Ireland originally. It was cited
by nearly one-half of these respondents, and
according to almost one-third the corporate tax
rate will continue to underpin the attractiveness
of Ireland’s business environment (in addition to

© The Economist Intelligence Unit Limited 2012

Access to EU
markets

Legal & fiscal
stability

Corporate tax
rate regime

Access to
skills locally

Ease of doing
business

Access to
EU skills

Double-taxation
agreements

Access to
government

Sector-specific
incentives

0
English-speaking
member of euro zone

6

IT & telecoms
infrastructure

Ireland, in
particular
Dublin,
thanks to the
International
Financial
Services Centre
(IFSC), is a
global centre of
excellence for
mid- to backoffice staff.

9

11

Existing
clusters

8

0

23 23 23

30

49

other aspects of the corporate tax infrastructure,
such as double-taxation agreements). For firsttime investors the picture is different, with access
to EU markets the most significant factor. For
financial services particularly, the presence of a
cluster of similar companies doing similar things
was also important for an ongoing presence.
“Ireland, in particular Dublin, thanks to the
International Financial Services Centre (IFSC), is
a global centre of excellence for mid- to backoffice staff,” says Bob Keogh, director of Goldman
Sachs Bank (Europe). “Just as Mayfair teems with
traders, the IFSC has a core of people at work in
the sector for the long term.”


Investing in Ireland: A survey of foreign direct investors

Four alternatives: Market access drives
investment in China, Singapore, the UK and the US
Four countries topped the list of alternative
investment locations for respondents besides
Ireland: China (33%), Singapore (29%), the
US (28%) and the UK (27%). The remaining
16 options each received less than 20% of
responses. Among financial services firms,
China was even more attractive (35%), while
Hong Kong displaced the UK as the fourth most
attractive destination (25%, as against 23%
for the UK). Other popular FDI hosts in western
Europe were the Netherlands, Switzerland
and Belgium, chosen by 13%, 10% and 4% of
respondents respectively.

(the US and China) or regionally (Singapore and
the UK). After market access, each of the top
destinations had different investor propositions
(see Figure 2: Word clouds). China’s proposition
is clearly based around its role as a growth
market as well as its low cost, including taxes.
Singapore’s offering is based around a stable
system, ease of doing business and low taxes.
Investment into the US focuses on its domestic
market and the business opportunities there,
while the UK’s offering is about market access,
ease of doing business and skilled labour.

Among the top four destinations, the main

driver was market access, either domestically

Figure 2. FDI propositions: Word clouds (main reasons why respondents chose FDI locations)



China

US

Singapore

UK

© The Economist Intelligence Unit Limited 2012


Investing in Ireland: A survey of foreign direct investors

1

The corporate tax infrastructure:
An important ingredient

Following the EU-IMF loan to Ireland in late
2010 and Ireland’s ongoing fiscal deficit, the
country’s headline corporate tax rate has become
a pivotal issue in its relationship with the rest
of the EU. Since then the corporate tax rate has
become a symbol of Ireland’s sovereignty, with

fears that a higher rate will reduce investment
into the country. Overall, the survey shows that
the headline rate is part of a larger corporate

tax infrastructure that policymakers must also
monitor, and the tax infrastructure can be seen
as one of four cornerstones in Ireland’s FDI
proposition (along with market access, skills
and talent, and a favourable regulatory regime).
The survey shows that Ireland’s competitive
corporate tax rate is indeed a key component
of its FDI proposition. As mentioned above, of
those survey respondents who already have

Figure 3
The most important fiscal incentives for investors
(%)

Financial Services

All

Non-Financial Services

50
45
40

50
49

45

46

40

41

35
30

35

38
34

30

31

25
20

24

25

25
24

20

15

20

20

20

21

20

21

10

20

18
13

15

14

16

5

10
5

0

0
Low corporate Double taxation Transfer pricing Access to local Training & other
tax rate
agreements with taxation rules sources of credit human resources
treaty countries
& funding
grants



15

© The Economist Intelligence Unit Limited 2012

R&D
tax credits

Personal
tax rates


Investing in Ireland: A survey of foreign direct investors

FDI operations in Ireland, corporate tax was

the single most cited factor originally bringing
FDI to Ireland, according to almost one in two
respondents (44%). However, it is far from
the only factor in the tax infrastructure.
As mentioned above, 29% of respondents
highlighted the corporate tax rate regime
as one of Ireland’s three main competitive
advantages (See Figure 1, page 7). In addition,
16% mentioned double taxation treaties and 14%
mentioned sector-specific initiatives. Taken as
a whole, the response suggests that the entire
corporate tax package is an important driver for
investors and policymakers should not focus only
on the headline rate. And as Figure 3 (page nine)
shows, other tax incentives play a large role in
investment decisions, in addition to the rate.

Double-taxation treaties are also
important
Ireland’s corporate tax infrastructure is not
only about the rate of tax. Another government
incentive to be cited by more than one in three
investors was the network of double-taxation
agreements between countries. This was
particularly important for financial services firms
(39%) and firms from the euro zone (44%). The
network of double-taxation treaties was cited as
a key factor by more than one-half (56%) of firms
with no presence, current or planned, in Ireland,
while it was significantly less important to firms

already present and with plans to expand (19%).
Extending treaties in this area could see a new
type of investor come to Ireland.

Research and development tax credits

Malta is not included in the
Paying Taxes study and was
omitted from the analysis.
1

10

R&D tax credits were cited by 18% of the sample
as a whole, but there were some important
differences across the sub-sets of respondents.
For example, R&D tax credits were cited by just
under one in three firms planning to expand in
Ireland as important (29%), and also featured as
an important issue for information technology
(IT) firms (30%) and companies based in
developed countries outside the euro zone and
the US (32%).
© The Economist Intelligence Unit Limited 2012

Importance of corporate tax rate differs
by sector
The importance of the corporate tax rate varies
significantly by industry, with pharmaceutical
firms (65%) and those based in the euro zone

(64%) most likely to cite its importance. Firms
from the US (35%) attached far less significance
to this incentive. For firms planning to invest in
Ireland for the first time, the tax rate was also
less of an issue (33%), and they attached almost
equal importance to transfer pricing rules (31%).
Interviewees urged policymakers to put the
corporate tax rate in context with other drivers as
well. “While factors such as a common currency
and low corporate tax help, it is ultimately
Deutsche Bank’s ability to serve many markets from
Dublin, thanks to technology, that matters most,”
says Michael Whelan, director and chief country
officer (Ireland) for Deutsche Bank. Similarly,
other interviewees say that when it comes to
deciding where to put core business, the key issue
for senior management is making profits, with
the tax treatment of that profit more an issue for
their advisers. It is important also to compare the
“effective” corporate tax rate (the headline rate
after credits and exemptions) with the headline
rate in Ireland and in other countries. Of the 16
euro zone countries shown, Ireland’s effective rate
of 11.9% is in line with both the mean (11.8%)
and median (12.7%) rates paid elsewhere in the
single currency area.1 According to the World Bank,
companies in the euro zone are in effect paying
similar amounts to those in Ireland.

One of four cornerstones

Ireland’s tax infrastructure – which includes not
only corporate tax rates but also the network of
double-taxation treaties and other taxes – can be
regarded as one of four cornerstones of Ireland’s
FDI proposition. So while the government is
understandably keen to defend a core competitive
advantage, excessive focus on corporate tax
rate ignores the importance of the wider tax
infrastructure, and can also hide changes to
Ireland’s competitiveness in other areas. This
includes personal income tax rates, which are
discussed in the following section.


Investing in Ireland: A survey of foreign direct investors

Figure 4
Headline and effective corporate tax rates in the euro zone, 2011
(%)

Headline corporate tax rate

Effective corporate tax rate

35

35
34
30
46

33

32

25

26

25

25

21

21

20

19

13

10

10
7

5

8

13

14

15

15
15 15

10

9

5

5

Sources: World Bank; PricewaterhouseCoopers, Paying taxes.

© The Economist Intelligence Unit Limited 2012

Italy

Netherlands

Germany

Portugal

Slovenia

Finland

Greece

Ireland

Cyprus

France

Estonia

Slovakia

Belgium

0
Luxembourg

Spain

1

4

8

12

14

20

19

15

11

25

25
23

20

0

30

31

29

Austria

30

Investing in Ireland: A survey of foreign direct investors

2

Percentage of persons with upper-secondary or tertiary education, ages 25-34
(%)

100

100

90
80
70

71

60
50

75

81

82

82

83

84

85

87

87

87

88

88

91

90
80
70
60

64

50

52

40

© The Economist Intelligence Unit Limited 2012

Finland

Austria

Sweden

New members

Ireland

Germany

Denmark

France

0
UK

0
Netherlands

10
Belgium

10
EU27

20

Greece

20

Italy

30

Portugal

30

Source: Eurostat.

12

was the only euro zone member to fully open its
labour markets immediately to the ten new EU
member states from Central and Eastern Europe
which joined in 2004.) Indeed, when asked to list
Ireland’s main disadvantages (see next section
for full analysis), a lack of skilled labour was
the factor least commonly cited (by just 6% of
respondents).

Figure 5

40

Paul Duffy, vice
president with Pfizer

A differentiator under threat?

Access to skills – both home-grown and from
across the EU – is of increasing importance for
Ireland’s FDI proposition. Just over one-quarter
(28%) of all survey respondents mention the
educated and skilled local workforce as one
of the country’s key competitive advantages,
while a further (23%) mention Ireland’s base
of skilled labour from across the EU. (Ireland

Spain

The reason
that Pfizer
has expanded
in Ireland so
extensively is
the country’s
proven ability –
from as early as
the late 1960s
– to deliver.
The people are
reliable and

can handle
complexity.

The talent base:


Investing in Ireland: A survey of foreign direct investors

Unique aspects of the workforce

In the area of
income taxes,
Ireland’s
competitiveness
has been
seriously
undermined.

Those interviewed for this report particularly
stressed their companies’ ability to access a
skilled workforce by setting up in Ireland. The
country’s domestic labour force is the youngest
in western Europe; it is highly educated and
benefits from relatively flexible regulations.

While the level of formal education qualifications
is one area where Ireland’s local labour force
performs strongly, it is not unique in this
regard, as Figure 5 shows. However, a number
of interview respondents also pointed to innate

Willie Slattery, executive (and more difficult to measure) advantages of
vice-president and head Ireland’s workers. These include the ability to
of European offshore
handle complexity and to identify and resolve
domiciles for State Street
issues early. Paul Duffy, a vice president with
Pfizer, a pharmaceutical company, describes a
major factor behind his company’s development
in Ireland: “The reason that Pfizer has expanded
in Ireland so extensively is the country’s proven
ability – from as early as the late 1960s – to
deliver,” he says. “The people are reliable and can
handle complexity.”
Similarly, John Herlihy, a vice president at
Google, says: “There is a degree of flexibility,
both innate and regulatory, about Ireland’s
workforce that is unique in Europe. Perhaps
because of Ireland’s history, the spirit is to
resolve differences when they are found, and
then move on, resolve and move on.”

Attracting top talent – the role of
personal income taxes
While there is consensus among both
interviewees and survey respondents about the
quality of labour available to firms that set up in
Ireland, there is concern about how attractive
Ireland will be for talent, especially senior talent,
into the future.

Figures in this paragraph
are taken from the OECD’s
Taxing Wages 2010 and
Taxation Database.
2

13

For a typical worker, Ireland’s taxes are very low
in terms of overall income, but for higher earners
it has some of the highest marginal rates in the
world. In 2010 a married couple with one earner
on the average wage and two children paid less
© The Economist Intelligence Unit Limited 2012

than 5% in tax, once all the factors, including
benefits, had been taken into account. This was
the fifth-lowest percentage in the OECD and the
lowest in the euro zone. However, the top “all-in”
marginal income tax rate in 2009 for top earners
was 50%, one of the highest in the OECD, a
situation exacerbated by the introduction of the
Universal Social Charge in 2011, a new tax
on income.2
There is concern among interviewees about
Ireland’s personal income tax regime. “In the
area of income taxes, Ireland’s competitiveness
has been seriously undermined,” warns Willie
Slattery, executive vice-president and head of
European offshore domiciles for State Street, a

financial services company. Likewise, Mr Whelan
of Deutsche Bank says it is “naive to think that
personal tax rates can be increased without any
collateral damage to Ireland’s FDI proposition”.
According to Mr Herlihy of Google, if Ireland is
not attractive to senior executives, around whom
operations in Ireland are built, it will find it more
difficult to bring new projects here: “Ireland must
facilitate key executives to come here. Junior
talent joins a company to learn and leave; senior
talent comes to build and stay.”
The issue of personal tax rates is relevant to both
Ireland’s fiscal correction and its desire to win
new FDI projects and jobs. For example, Ireland
competes internationally for front-end financial
services (trading and investing). Both Mr Keogh
of Goldman Sachs and Mr Whelan believe that
given the high density of traders in London, if
Ireland actually wants to win significant business
in this area and bring traders to Dublin, the only
way to compete would be through lower marginal
tax rates on personal income.

Income taxes – a weakening
competitive advantage?
Survey respondents were asked to rate the
competitiveness of Ireland’s tax regime across
six headings, including corporate tax, R&D tax
credits or training grants. Income tax was the

Investing in Ireland: A survey of foreign direct investors

Ireland must
facilitate key
executives
to come
here. Junior
talent joins
a company
to learn and
leave; senior
talent comes to
build and stay.
John Herlihy,
vice president of
international SMB
sales, Google

weakest perceived competitive advantage of
the six. In particular, among IT firms surveyed,
the net score of favourable to unfavourable in
this area was just +3%. Similarly, among firms
based in euro zone countries and other non-US
developed economies, the net score was positive
but small, with the bulk of respondents saying
that personal tax rates were about the same as in
other investment jurisdictions. For firms planning
to invest in Ireland for the first time, personal
income tax is viewed as more competitive than

in other FDI locations (a net score of +43%).
Those planning to invest in Ireland for the first
time view the personal income tax system in the
country as more attractive than those who are
already investing. This gap between firms which
are already established and those planning to do
so suggests that hidden taxes, such as employers’
Pay Related Social Insurance (PRSI) and the
Universal Social Charge, may be an unexpected
cost once they have settled in Ireland.

Alternatives for addressing tax
competitiveness
The gap between low average taxation and
very high marginal income tax rates is just one
pressing concern in relation to income tax in
Ireland. Another is the Irish government’s need
to raise tax revenue significantly, with a deficit
of over €16bn projected for 2012, compared
with gross government receipts of €53bn. One
area to examine is Ireland’s comparatively
generous tax-free allowances at lower-income
levels. In Ireland, until 2010, it was possible to
earn €18,000 without entering the tax net. In
contrast, the tax threshold for workers in France
is €6,000 and €8,000 in Germany.
Raising further revenue from income tax does
not need to be done at the expense of Ireland’s
competitiveness: by bringing tax credits in
Ireland into line with those elsewhere, more

14

© The Economist Intelligence Unit Limited 2012

could be raised through taxation without further
threatening the incentive to work.
Another alternative to direct taxation is indirect
taxation, that is, taxes on consumption rather
than income. However, Ireland’s value-added
tax (VAT) rate, at 23% since the 2012 budget, is
among the highest in the world. More worryingly,
higher VAT pushes up the cost of living, and
Ireland is already recognised as a high cost-ofliving location. Just 20% of survey respondents
stated that when it came to cost of living, Ireland
compared favourably with other FDI destinations
in which they had operations, while 42% said
Ireland’s cost of living was worse.
The third type of taxation is on wealth,
in particular property. The single biggest
contributor to the fall in tax revenue has been
the loss of revenue associated with Ireland’s
booming property market. However, the taxes
used – in particular stamp duty – are regarded
internationally as inefficient and prone to
contributing to boom and bust cycles. Ireland
is the exception among developed countries
in that it does not have a recurring tax on
property, which presents the government with
an opportunity to consider a land value tax. This

type of tax, on the value of sites rather than
on buildings, encourages the productive use of
land and makes it less attractive to hold land
speculatively, which has been a major reason for
Ireland’s property bubble.
Land value taxation, or site value taxation, could
be a key source of stable revenue and one that
is both fair (as wealthier households pay more)
and efficient (as the supply of land is fixed and
will not respond to changes in taxation), unlike
taxes on income or consumption, which distort
economic outcomes.


Investing in Ireland: A survey of foreign direct investors

3

Ireland’s biggest disadvantages:
Outside control of policy

Ireland’s four main disadvantages in the eyes
of global investors lie largely outside the
government’s immediate control. Two relate
to facts of geography. The size of the domestic
market was cited as a downside by one-half of
all respondents (51%), and Ireland’s peripheral
location was mentioned by nearly one-third

(31%). The other two relate to risks associated

with the current national and international
macroeconomic situation: the instability of
the euro zone (33%) and uncertainty about
government finances (32%). The six other factors
listed were each chosen by less than one in
five respondents.

Figure 6
Ireland’s biggest disadvantages in the eyes of investors
(%)

All

Financial Services

Non-Financial Services

60
50

60

51

50

53
49

40

40

41

30

33

20

35
31

32

30

33

30

31

21

23
19
15

10
0
Size of
domestic
market

15

20

17
14

20
17

15

18

14 15

12

9

10

11
7

6

5

7

Instability Uncertainty Peripheral High cost Red tape
Poor
Tax burden Poor IT/
Lack of
in the
about
geographic of doing
and
transport/
communications skilled
euro zone government location
business bureaucracy physical
infrastructure labour
finances
infrastructure

© The Economist Intelligence Unit Limited 2012

0


Investing in Ireland: A survey of foreign direct investors

Location matters more to financial
services firms

firms, for example, are more concerned about
poor infrastructure, both physical (32%) and
ICT (19%) than those in financial services (15%
and 7%). The high cost of doing business was
highlighted disproportionately by firms with no
presence in Ireland and no plans to set up here:
34%, compared with 19% for the whole sample.

Ireland’s peripheral geographical location
matters more to financial services firms (41%)
than to those involved in IT or pharmaceuticals
(17%). This may seem strange, given both
legislative (EU single market) and technological
developments that enable internationally trading
services firms to use Ireland as an export base.
However, as Christian Saller, the managing
director of KAYAK Europe, a technology firm,
explains, geography can still matter, both for
attracting talent and for doing business. When
KAYAK was choosing its EMEA headquarters, both
Zurich and Dublin were on its shortlist, but it
ultimately opted for Zurich owing to reasons of
geography. Zurich was chosen because it met two
particular criteria: the ease with which KAYAK was
able to hire skilled multilingual staff prepared to
move to the chosen city, and the ease with which
employees could get to other European locations

when working. Even in online commerce, face-toface matters.

The best small country?
Since taking office in early 2011 the Irish
taoiseach (prime minister), Enda Kenny, has
stated on a number of occasions that he wants to
make Ireland “the best small country in the world
in which to do business”. According to the World
Bank’s 2012 Doing Business rankings, Ireland
ranks 10th worldwide for ease of doing business,
behind a number of small economies but also
some larger countries, including the US (4th),
the UK (7th) and Korea (8th). Ireland’s ranking
fell two places from 2011, principally owing to
poorer relative performances in registering
property and enforcing contracts.
The table below compares Ireland’s performance
with best practice globally across six headings of
doing business. The metric used is the number
of days associated with a procedure. As it shows,
there is significant room for Ireland to improve
across most of these headings. While time spent
on administrative burdens relating to trading
across borders and paying taxes is close to
best practice globally, those associated with
starting a business and registering property
take up significantly more time than the
one day in leading countries. In the areas of

Other challenges – high costs and

bureaucracy
While the top four factors are all largely outside
the control of policymakers, other disadvantages
did feature among investor concerns. The two
most frequently cited of the remaining six were
the high cost of doing business (19%) and
red tape and bureaucracy (17%), with poor
physical infrastructure, including transport, also
registering with about one in six respondents.
There were some differences across sectors. IT

Days spent on certain business procedures, Ireland and best practice
Area

Best practice

Ireland

Starting a business

1

13

Construction permits

26

141

Getting electricity

36

205

Registering property

1

38

Paying taxes

3.2

3.2

5

7

Trading across borders
Source: World Bank 2012 Doing Business rankings
16

© The Economist Intelligence Unit Limited 2012


Investing in Ireland: A survey of foreign direct investors

Figure 7
Ireland’s tax and cost competitiveness compared
(%)

All

Financial Services

Non-Financial Services

60

60

50
40
30
20
10

43
34 35 34

42

37
32

34

47 46

46

48

49

51

50
48

40

38

30

27

20

20

10

0

0

-10
-20
-26

-30

-21

-19

-10

-14

-16
-24

-30

-22
-28

-35

-40
Other
Training Personal Doubleincentives grants tax rates taxation
treaties

R&D tax Corporate Utilities,
credits tax rate
infrastructure

-20
-27 -28-26

Rents

Cost of
living

-32
-38

-30
-40

Raw
Wages &
materials salaries

Note. Net score "compares favourably" minus "compares unfavourably".

construction permits and getting electricity, the
delays associated with these procedures mean
that Ireland ranks 27th and 90th respectively
worldwide. These are areas well within the
control of policymakers, and action taken

– even if policymakers were to perceive that
the actual benefit to business of one particular
process is limited – would show determination
to international investors, who rely on such
international rankings to inform their decisions.

Costs in focus: comparing Ireland with
other investment destinations
Respondents were asked to rate how Ireland
compared in terms of six different sets of
business costs to other locations in which they
did business: wages and salaries, raw materials,
cost of living, rents, utilities and infrastructure,
and the overall tax burden. Ireland compares
unfavourably with other destinations for FDI
across all cost headings other than tax. This is
particularly the case for wages and salaries,
where one-half of respondents (51%) say
Ireland is more expensive, while just 16% say
17

© The Economist Intelligence Unit Limited 2012

it is cheaper (a “net score” of -35%). The figure
rises to 57% for emerging-market respondents
and 69% for those with currently no presence in
Ireland. High wages are an important ingredient
for attracting talent, but mean that productivity
has to be high to compensate. For raw materials,
cost of living and rents and utilities, about two in

five respondents say Ireland is more expensive,
with less than one in five saying it is cheaper.
These net scores are outlined in the bottom half
of Figure 7 – all are negative and significant,
unlike Ireland’s tax competitiveness, shown in
the top half of the same figure, where all net
scores are strongly positive.

The cost base: regional differences
There are important regional variations in
how expensive Ireland’s cost base appears to
investors. In particular, firms from elsewhere
in the euro zone view Ireland as an expensive
location for business costs, for the cost of living (a
net score of -46%), but also rents (-37%), wages
and salaries (-32%) and utilities (-28%), while US
respondents report similar scores. For firms from


Investing in Ireland: A survey of foreign direct investors

developed countries other than the US or the
euro zone, though, Ireland’s cost competitiveness
is typically much less of an issue. On salary costs,
the net score is negative but much smaller than
for other regions (-9%), similar to that for cost of
living (-8%), while rents has a net score of zero.
For firms from emerging markets Ireland is not
cost competitive in wages and salaries, with a net
score of -48%. Utilities and infrastructure costs

are also not competitive compared with other
countries (a net score of -22%).
Looking at firms by current status in Ireland,
firms not located in Ireland and with no plans
to set up there found it particularly expensive
for business costs: a net score of -65% for
salaries, -47% for utilities, -46% for cost of
living, and -33% for rents. However, while firms
planning to invest in the country did view it as
more expensive for wages, aside from that it
was viewed as typically in line with other FDI
destinations. For firms established in Ireland and
planning to expand, the cost of living (net score
of ‑16%) was one concern, while another was the
level of rents (net score of -11%).

18

© The Economist Intelligence Unit Limited 2012


Investing in Ireland: A survey of foreign direct investors

4
In the shortterm, the real
depreciation
that Ireland is
undergoing at
the moment
will be painful,

but Ireland’s
economic crash
will definitely
have a long-run
positive impact
on Ireland’s
competitiveness.
John Fitzgerald, head
of macroeconomics,
Economic and Social
Research Institute,
Ireland

19

Responding to the crisis
Boosting competitiveness at the same time

Ireland has seen one of the most dramatic
economic contractions in economic activity of
any developed economy in the post-war era, with
nominal GNP falling by almost 19% between early
2007 and early 2011 and unemployment rising
from 4% to 14% over the same period. As is the
case with any severe economic downturn, there
are real and human costs of adjustment.
However, as is evident from Ireland’s banking
and property sectors, much economic and
employment growth leading up to 2007
was related to a financial and real estate

bubble, which impacted the country’s cost
competitiveness. Whereas consumer prices
(as measured by the EU’s Harmonised Index
of Consumer Prices) increased by 2.4% a year
in the EU and in the euro zone between 2000
and 2008, they increased by 3.5% annually in
Ireland. Between mid-2008 and the end of 2011,
however, Ireland regained some of its lost cost
competitiveness: while prices increased annually
by an average of 1.8% in the euro zone, prices fell
in Ireland by an annual average of 0.8% during
that period.
“By 2006 Ireland was not competitive,” says
John Fitzgerald, head of macroeconomics at
the Economic and Social Research Institute in
Ireland. “Effectively the construction sector had

© The Economist Intelligence Unit Limited 2012

crowded out the trading sector, particularly in
the labour market. In the short-term, the real
depreciation that Ireland is undergoing at the
moment will be painful, but Ireland’s economic
crash will definitely have a long-run positive
impact on Ireland’s competitiveness.”
Willie Slattery of State Street agrees: “Ireland
is now more competitive than it has ever been,
in a relative sense, given the clusters and skills
here that were not here in the 1990s.” Numerous
interviewees say that what they noticed most

was how much easier it is to hire, while some
point out that wages for employees entering the
workforce are down by as much as 20%. Overall,
respondents’ plans for their investments reflect
confidence in the future. Of the 315 respondents,
only ten say they plan to reduce their level of
investment in Ireland over the next three years.
Extrapolations from the survey results suggest
that new investments from those already in
Ireland could create up to 20,000 new jobs during
the same time frame. The calculations point to
nearly half of these new jobs being created in
the financial services sector, followed by about a
quarter from IT and online industries. Split along
geographic lines, about just over half would
come from US-based investments, and just over
a quarter from developing countries. Although
based on opinion data, and not a rigorous


Investing in Ireland: A survey of foreign direct investors

economic forecast, it points to very favourable
sentiment towards Ireland by investors.

On the right track
Nearly one-third (31%) agreed with the
statement: “I have more faith in Ireland’s new
government than in the previous one”, while just
10% disagreed. Among respondents from Ireland,

the net score was 64%, compared with just 10%
for respondents from the emerging markets.
There was also an important distinction according
to experience: firms with no operations in Ireland
were overwhelmingly neutral on this point (88%
expressing no opinion), whereas 60% of firms
planning to expand agreed with this statement.
There is a belief, however, that Irish affairs
are increasingly determined outside Ireland,
with more than one-half of all respondents
(53%) agreeing that Ireland’s economic policy
is increasingly determined by international
institutions, with just 4% disagreeing. Euro zone
respondents were particularly likely to agree
(68%), although one-half of emerging-market
respondents were neutral on this point.
Government priorities are in line with investor
expectations. Respondents’ top policy
prescriptions for the government are stabilising
Ireland’s financial system (51%), attracting
inward investment (37%), and addressing the
budget deficit (30%). These priorities did not

20

© The Economist Intelligence Unit Limited 2012

vary substantially by sector, although financial
services respondents were more likely to stress
fixing the financial system (57%) and attracting

inward investment (43%) than other priorities.
IT respondents were more likely to stress the
supply of skills. “A few years ago, all the money
was in construction and banking, and so those
sectors attracted the young talent,” says Lionel
Alexander, vice president and managing director
of manufacturing for Hewlett Packard. “Ireland’s
skilled labour force was abandoning technology
and the other skills that had been a hallmark of
Ireland’s success. This is turning around now,
although Ireland still lacks IT graduates.”

Trade-offs delineated
In many areas, there is no trade-off between
overcoming the crisis and boosting Ireland’s
competiveness. For example, tackling the
high cost of doing business in Ireland is both a
domestic vote-winner and a competitivenessbooster. Likewise, tackling the deficit increases
domestic economic sustainability and convinces
international investors that Ireland is a sound
place in which to do business. Other aspects
of Ireland’s recovery, however, have very real
trade-offs. This is particularly the case in the area
of financial regulation, a topic explored in more
detail on the following page.


Investing in Ireland: A survey of foreign direct investors

Financial regulation: Getting the balance right

There is
definitely scope
for the IFSC to
scale up and
create the same
number of new
jobs out of
the resources
available from
the domestic
banking
sector, but the
regulatory setup needs to be
appropriate.
Bob Keogh, director,
Goldman Sachs Bank
(Europe)

The collapse of Ireland’s financial system over
2008 and 2009 highlights very real regulatory
failures of the domestic banking system.
Understandably, there has been significant reform
of the regulatory environment in which financial
institutions operate, including new corporate
governance codes. The financial regulator has also
been more proactive in sanctioning firms, with
an average of eight settlement agreements a year
since 2008, compared with just two in 2006 and
five in 2007.
However, with significant public anger about the

collapse of Ireland’s financial system, investors
believe there is the risk that the need to be seen
to be doing something replaces doing the right
thing. “Foreign-owned financial services firms
that have come to Ireland and created thousands
of jobs in no way caused Ireland’s bubble but are
now among those most being affected by the
backlash,” says Willie Slattery of State Street
Corporation. In July 2011 the Irish government
launched its Strategy for the International
Financial Services Industry in Ireland 20112016, which had the principal target of creating
10,000 net new jobs in the sector. If Ireland
wants to deliver on its target, financial regulation
needs to distinguish clearly between domestic
and International Financial Services Centre
operations.
Interviewees spoke of the danger to Ireland’s FDI
proposition of being perceived as an “awkward

21

© The Economist Intelligence Unit Limited 2012

regulator” on non-core issues such as
board memberships. One example shows
the potential for the law of unintended
consequences to undermine Ireland’s
competitiveness. The Central Bank’s
Corporate Governance Code for Credit
Institutions and Insurance Undertakings

requires that there must be 11 meetings a
year of the board and that members must
be there in person. This has the effect of
pushing key personnel and expertise in these
companies off the boards of Irish operations.
Interviewees point out that without the
senior talent on board, Ireland will find it
more difficult to stay on the radar of the key
people who create jobs.
Investors interviewed believe that both
the opportunity and the threat to Ireland’s
competitiveness are real, with future job
creation at stake. Ireland’s domestic banking
system is currently being restructured,
a process which is likely to result in the
shedding of thousands of jobs. Bob Keogh
of Goldman Sachs believes that “there is
definitely scope for the IFSC to scale up and
create the same number of new jobs out of
the resources available from the domestic
banking sector, but the regulatory set-up
needs to be appropriate.”


Investing in Ireland: A survey of foreign direct investors

Conclusion

Ireland’s unique selling
proposition

Very few countries offer investors any single
factor that is completely unique to that
location – instead, what attracts FDI is a unique
combination of drivers. The survey suggests
that in Ireland’s case, its “unique selling
proposition” is a bundle of four factors attractive
to investors. Access to EU markets is one. The
corporate tax infrastructure is another. Ireland
is also recognised as a stable environment that
prioritises the ease of doing business. And access
to skills, both domestic and from across the EU,
is a competitive strength and one that is likely to
grow in importance as skills-driven international
services comprise a larger share of trade and
investment.
Ireland’s economic crisis has made its future
ability to trade on these advantages more
uncertain. Taxes will have to rise, although
there are obvious candidates in the excessively
generous tax credits and lack of an annual

22

© The Economist Intelligence Unit Limited 2012

property tax. But despite the short-term costs
and the greater role international institutions are
likely to have in important economic decisions,
investors believe that the crisis represents a huge
opportunity to boost Ireland’s competitiveness.

The cost of living in Ireland is slowly improving
compared with other countries, following years of
inflation which have left the country regarded as
expensive internationally.
But while bringing down the cost of living will
both win votes domestically and attract jobs from
abroad, there are other areas where trade-offs
may exist. The new government in Ireland has set
a target of becoming the best small country in the
world in which to do business by 2016. However,
its regulatory response to the collapse of the
domestic banking sector is already generating
concerns about heavy-handedness among
internationally trading financial services firms.
Getting the response right on these and other
critical investment issues will be key to Ireland’s
success in maintaining the four cornerstones of
its FDI proposition.


Investing in Ireland: A survey of foreign direct investors

Appendix

Full survey results
Do you have responsibility for or familiarity with your company's international investment decisions?
(% respondents)
Yes
100

Are you familiar with your company's current or prospective investment(s) in Ireland?
(% respondents)
Yes
100

What is the prime motivation for your company to enter foreign markets? Select up to three.
(% respondents)
Access to markets
58

Availability of key skills (eg, language)
34

Government incentives, including tax incentives
32

Legal transparency and ease of doing business
32

Educated labour force
24

Local labour costs
21

Strong intellectual property protections
15

Local non-labour costs
10

Access to natural resources
10

23

© The Economist Intelligence Unit Limited 2012


Investing in Ireland: A survey of foreign direct investors

How significant are the following factors to your worldwide direct investment decisions?
(% respondents)

Very significant

Somewhat significant

Not significant

Not applicable/Don't know

Ease of doing business
56

40

31

Political stability

50

44

51

Cost of doing business
51

44

5

Fiscal certainty
34

53

12 1

Intellectual property protections
35

41

22 2

Tax incentives for investors
39

49

11

Regulatory incentives for investors
34

49

16 1

Access to pool of local skilled labour
38

48

13 1

Ease of attracting key mobile international staff (cost of living, quality of life, etc)
29

55

14 1

Thinking about fiscal incentives offered by host countries, what are on balance the two most important types of incentive for
your company? Select up to two.
(% respondents)
Low corporate tax rate
46

Double taxation agreements with treaty countries
34

Transfer pricing taxation rules
23

Access to local sources of credit and funding
20

Training and other human resources grants
20

R&D tax credits
18

Personal tax rates
15

Other, including industry-specific tax incentives, please specify
2

24

© The Economist Intelligence Unit Limited 2012